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Choosing the Right Type
of Fund for your Investment Objective
When you have young children, you have many things to think about, and lots of important decisions to take! Right away, your children will need toys, books, clothes and lots more. Soon
after, you’ll have to pick a school for them, and put them in hobby classes, sports, workshops, making sure these choices are made well, because it will shape their knowledge and personality. And you can’t neglect their future. You have to plan for quality higher education, and for their weddings. (Whew
!) That’s a lot of different goals and expenses, and you have to keep them all in mind! And that’s only for your children! Life
has lots more expenses and decisions in store for you - big decisions and small ones, urgent expenses and not-so urgent ones (Ughh). Well, these would all be pretty easy to handle if there were one single solution, wouldn’t they? Problem
is, it’s not that simple
, these decisions could be a lot simpler if an investor understands one simple thing – just like there are varied financial goals with varied time horizons, there are also varied investment products to serve each goal. And selecting the right investment options is crucial to achieving those financial goals.
So how does one begin to categorize these goals? Umm… think of them in two ways – there’s goals based on their nature and those based on the time horizon involved.
on, you should also know that every goal, even the ones classified by nature, needs to have an appropriate time horizon attached to it. You can’t buy your kids toys when they’re about to go to college, that’s something you’ve got to do right now! And just like that, you can’t think of accumulating wealth right away! That’s something you need to think about in the long-term.
Right. Which is why listing and classifying goals, will help an investor begin prioritizing, separating important, not so important, urgent and distant future goals. So instead of choosing the wrong investment options, investors can first allocate funds for the important and urgent goals, and then for the others.
, scenario #1 – let’s focus on two of your important life goals - owning a house in 10 years, and sending your son abroad to study in 15 years. Both these goals require a steady growth of investments – meaning they’re long-term, accumulation goals.
Well, in this situation an investor could consider investing in equity schemes of course depending on the risk appetite, with a range of diversified equity funds to choose from – like large, mid, small cap as well as sector funds – all depending on one’s risk-taking ability. or An investor could also choose between investing lump-sum amounts or starting a systematic investment plan SIP
look at another scenario - It’s
your lucky day, and you just won a prize of Rs. 5 crore at a game-show! Obviously
, with this sudden windfall of money, you don’t already have a plan of how to invest it. So what do you do?
of leaving the money in a savings account, while deciding where best to invest it, investing in a liquid fund or a short term fund would generate returns in line with the prevailing interest rates, with low risk to capital.
And now case #3 - Fast forward
to your time of retirement… you’ve served 30 years in a company, but they’re offering you no pension. So You
’ve got about 75 lakhs through regular savings, and now you want a regular income from your investments, to fund your retired life.
In this case, an investor could consider dividing the investment into different buckets to fund various needs over the short, medium and long term. With increasing life spans, an investor may want to opt for some investments in funds that have the potential to beat inflation over long periods such as large cap equity or balanced funds. A larger portion can then go towards a long-term bond funds to generate income that takes care of regular expenses.
There could be an endless number of scenarios, because life is dynamic and ever changing, but that’s what makes it a fun challenge! So don’t be bogged down by different responsibilities and financial pressures – whether it’s buying toys for your children, getting ready for their higher education or your retirement - just plan for all of them (Financial Plan
)! Now you know how to separate your goals, so you can stay on track… well, on multiple tracks. There are various types of Mutual Fund
schemes–for your different investment objectives. And your one stop-simple, solution? Mutual Funds
We hope you enjoyed watching this video! Watch
more, and we’ll help you learn about different investing concepts. You can also write to us with your feedback (firstname.lastname@example.org)
- published: 03 Feb 2014
- views: 141995